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What is a Stock Split?
A stock split is when a company’s board of directors issues more shares to current shareholders without reducing the value of their shares. A stock split increases the number of shares outstanding and decreases the individual value of each share. While the number of shares outstanding changes, the company’s overall market capitalization and the value of each shareholder’s shares remain the same. Let’s say you own one share of a company. If the company chooses a 2-for-1 stock split, the company will give you an additional share, but each share will be worth half its original amount. After the split, your two shares will be worth the same as the one share you started with.Why Do Companies Do Stock Splits?
Stock splits are often a sign that a company is growing rapidly and its stock price has increased. While that’s a good thing, it also means the stock has become less affordable for investors. As a result, companies may do stock splits to make the stock more affordable and attractive to individual investors. “When a stock starts to climb and looks expensive, it’s common to do a stock split to make your stock look more attractive than its per-share price to encourage buying,” says Meghan Railey, a Certified Financial Planner and CFO and co-founder of Optas Capital. And while stock splits can increase a stock’s liquidity and make it more accessible to investors, not all companies engage in them. According to Railey, some companies prefer to keep their stock price high. “There are two types of companies,” Railey says. “Growth companies want to see their stock price go up. Tesla likes their per-share price to be high because it adds to the appeal of their stock. Value stocks still have the opportunity to use stock splits to attract investors.” In the most famous example of a company that has avoided stock splits, Warren Buffett’s Berkshire Hathaway has never split its Class A shares. As of December 2021, shares are trading around $420,000.What is a Stock Split Reversal?
A reverse stock split reduces the number of shares of a company’s stock outstanding. If you own 10 shares of a company, for example, and the board announces a 2-for-1 reverse stock split, you will receive five shares. The total value of your shares will remain consistent. If the 10 shares were worth $4 per share before the reverse split, the five shares will be worth $8 per share after the reverse split. In either case, the total value of your investment remains $40.
What is Trading Range Theory?
Trading Range Theory is defined by the highs and lows of a security’s price, which fluctuate based on investors’ willingness to buy and sell. After a company announces a strong earnings report, for example, investors may rush to buy that company’s stock, causing the stock to reach its highest price in, say, a month. But in the days that follow, after the excitement over the earnings has died down, demand may not be strong enough to support this high price, and the stock begins trading slightly lower. Over the next few weeks, the stock may trade within a range of the previous month’s highs and lows. Some investors try to take advantage of these fluctuations by engaging in what is known as “range trading.” If you think a stock will remain within a certain range over a certain period of time, such as fluctuating between a low of $10 per share and a high of $20 per share, you might try to buy near the low and sell near the high. The risk, however, is that the security may not remain within this range. You might buy a stock at $11 per share as it approaches the low of its monthly trading range of $10, thinking that it will bounce back to the high. However, the stock price may fall to $5 per share over the next month. On the other hand, it is possible for a stock to exceed its Trading Range Theory as well. You may have sold the stock at $20 per share, thinking that was the peak. However, the stock may have continued to rise to $40 per share.Stocks or Forex, Which is Better? Here are the considerations
Return to the mean
Price behavior can be interpreted as a distribution that moves towards or away from the average price over time. Moving Average is the most popular method used to determine the average price of the market. Basically, the slope of the Moving Average is monitored to confirm the occurrence of a trading range. Prices are more likely to revert to the price above the Moving Average or below the Moving Average. The idea is to take advantage of the tendency of prices to revert to the mean. Several factors affect the price of securities, such as the type of security and the sector in which the security operates. For example, fixed-income tradable instruments exhibit smaller trading ranges than commodities and equities with high price volatility.Range-bound trading
Investors who want to profit from range-bound trading choose instruments with lower volatility because higher volatility indicates volatility in the market. High prices serve as key resistance levels in a range-bound market, which can be considered as the upper limit for price action and cannot be broken. Similarly, low prices act as key support levels, which can be considered as the bottom for price action. However, both high and low prices can be broken. To use a range-bound trading strategy, traders must first identify market conditions, which require key support and resistance levels, using various technical analysis approaches.How to determine ranging market
Traders can avoid false bounces or breakouts by adopting various methods, such as trade filters or trade triggers, to enter a trading range. There are various range-bound trading strategies, including key technical tools such as Bollinger Bands, oscillators, and Moving Averages, among others. With Bollinger Bands, the slope of the Moving Average passing through the middle of the band can be monitored to determine whether the market is range-bound. A flat or nearly flat slope indicates a potential trade. On the other hand, oscillators are used to determine a trading range by confirming a turn or resistance near or at support and resistance. If the oscillator line crosses the oversold boundary, a potential long trade is in the bid. Conversely, if the oscillator line crosses the overbought boundary, a potential short trade is imminent.What is Signaling Theory?
Shows that the market reacts to both good and bad signals, as they are considered indicators of potential returns. A theory that emerged from the study of information economics and deals with the idea of information asymmetry between buyers and sellers facing market interactions. Signals are actions taken by a more informed party to credibly communicate its actual characteristics to a less informed party. Signaling refers to the act of using inside information to initiate a trading position. This occurs when insiders release material information about a company that triggers the purchase or sale of its shares by people who do not normally have Insider information. Insider actions are considered market signals to outsiders. Market signals can be obtained by tracking the stock holdings and trading positions of company insiders. Insiders are usually senior executives or other large shareholders of the company. They may have decision-making power and can access internal information about the company.Examples of Signaling
If a company is willing to spend a lot of money to advertise a particular product, people will pick up on that market signal – the willingness to provide funds – in fact, it may mean more to them than the details in the advertisement. A company planning an IPO (initial public offering) that has a good future perspective and a higher chance of success, i.e. a ‘good company’, must always send a very clear signal to the market. For example, the owner must hold a significant percentage of the company. For the market signal to be reliable, it must be too expensive for a ‘bad company’ to imitate. If a company going public does not send a signal to the market, asymmetric information will lead to adverse selection in the IPO market. Now that you know what range trading theory is, you can also consider using range trading theory strategies in your trading. To learn more about different trading strategies, you can read through the GIC Journal or learn it through the GIC Academy so you can learn directly from the experts at GIC. To apply this trading range theory, you can trade by first registering yourself at GIC with trading capital starting from IDR 150,000!
